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TWN Global Economy Series no. 25

The Impact of the Global Financial Crisis on the Chinese Economy and China’s Policy Responses

By YU YONGDING

Publisher: TWN (ISBN: 978-967-5412-25-7)

Year: 2010   No. of pages: 48

ABOUT THE BOOK

China, one of the world economy’s great growth success stories, was badly hit by the global financial crisis in 2008. While adverse impacts from investments in toxic financial assets and from volatility in capital flows were relatively limited, the Chinese economy suffered a serious blow from the collapse in demand for its exports.

In response to the growth slowdown, the Chinese authorities adopted expansionary fiscal and monetary policy measures, including a 4 trillion yuan stimulus package and deep interest rate cuts, which sparked an economic recovery in 2009. However, concerns about the longer-term sustainability of China’s growth persist, given the many structural problems in the economy. This paper argues the need for urgently addressing these flaws – which range from unequal income distribution to the lack of a social safety net – if China is to embark on a more sustainable growth path. Above all, the author stresses, there should be a rethink of the export- and investment-led growth model which has served China so well but which may now require adjustment.

The global financial turmoil has also highlighted another major challenge facing China: safeguarding its huge stock of foreign exchange reserves against capital losses caused by a declining US dollar. This paper explores the steps that can be taken by China towards this end, including diversification of its reserve holdings and, in the longer run, rebalancing of its balance of payments. In addition, the paper also makes the case for reform of the international monetary system to address one of the root causes of this “dollar trap” and, indeed, of the global financial crisis itself.

This paper was prepared as part of a Third World Network research project on financial policies in Asia directed by Yilmaz Akyüz.

ABOUT THE AUTHOR

YU YONGDING is an Academician at the Chinese Academy of Social Sciences (CASS), former Director-General of the Institute of World Economics and Politics, CASS, and President of the China Society of World Economics.

Contents

1   INTRODUCTION                                                                                                    

    

2   TRANSMISSION CHANNELS OF ECONOMIC SHOCKS FROM THE GLOBAL CRISIS           

     Direct Losses in the American Capital Market                                               

     Fluctuations in Cross-Border Capital Flows                                                   

     The Impact of the Global Financial Crisis via the Trade Channel           

    

3   CHINA’S MAIN POLICY RESPONSES TO THE GLOBAL SLOWDOWN        

     Expansionary Fiscal Policy                                                                                  

     Expansionary Monetary Policy                                                                            

4   STRUCTURAL PROBLEMS IN THE CHINESE ECONOMY                

5   HOW TO SAFEGUARD THE VALUE OF CHINA’S FOREIGN EXCHANGE RESERVES          

     The Dollar Trap                                                                                                        

6   REFORM OF THE INTERNATIONAL MONETARY SYSTEM           

     Relationship Between Global Imbalances and Global Financial Crisis 

     Creation of an International Reserve Currency                                           

     IFI Governance Reform                                                                                         

7   CONCLUDING REMARKS                                                                                

References         

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